Question: The OIS zero curve is flat at 10% per annum with annual compounding. Calculate the value of an instrument where, in five years' time, the

The OIS zero curve is flat at 10% per annum with annual compounding. Calculate the value of an instrument where, in five years' time, the two-year swap rate (with annual compounding) is received and a fixed rate of 10% is paid. Both are applied to a notional principal of $100. Assume that the volatility of the swap rate is 20% per annum and that the 12-month LIBOR-OIS spread is zero. Explain why the value of the instrument is different from zero.

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